Gross-up clause

A gross-up clause is a contract provision which provides that all payments must be made in the full amount, free of any deductions without exercising any right of set-off. The provision will usually indicate that if there is a mandatory withholding or deduction required by law, then the paying party shall "gross up" the payment so that the receiving party receives the same net amount. The purpose of a gross up is so that the payer, instead of the payee, assumes the risk of any change in tax imposed. Gross-up clauses are found in international loan agreements, as well as executive compensation agreements.
The formula for calculating the total amount of a grossed-up payment is divided by. Thus, a $10,000 payment to a recipient who has a 35% tax rate would be / = = $15,384.62.